Chapter 2 - Contracts

Question 1

What are the two additional elements required for a real estate contract?

Answer 1

1) In writing and signed - RE and personal property contracts in excess of $500 require a written contract to be enforceable (Statute of Frauds)
2) Description of RE - accurate, valid, and sufficient description of property. Deeds/Deeds of Trust/Mortgages will be recorded in the public records require legal description

Question 2

What are the 3 forms of legal description that will be recorded in the public record?

What forms of RE description will not be recorded in the public records (“adequate” property description)?

Answer 2

Legal Descriptions:

• Metes and bounds
• U.S. governmental rectangular survey
• Lot, block, and subdivision

Documents not recorded that just need adequate descriptions:

• RE purchase agreements
• Leases
• Listings

“Adequate” property descriptions:

1) Address of the property
2) Assessor’s parcel number (APN) - the “account number” assigned to each parcel for recording payment of taxes

Question 3

What are the 5 essential elements of a contract (any contract)?

Answer 3

COLIC
Competent Parties - living, lawful age, sound mind, and mentally competent
Offer and Acceptance - “mutual assent” that shows a “meeting of the minds” that an offer was made and acceptance was reached
Legal
Informed parties - no fraud, misrepresentation, or duress. Fully informed, aware of agreement conditions, and consent to terms
Consideration - may be money, anything of value, or just a statement that consideration exists (love and affection)

Question 4

What is a valid contract?

Answer 4

Contract contains all 5 essential elements of a contract

Question 5

What is a void contract?

Answer 5

Agreement lacks any one or more of the essential elements

Ex. - if something is illegal or is impossible to complete

Question 6

What is a voidable contract?

Answer 6

Appears to be valid but may be disaffirmed because it is missing an element. Party had the right to void the contract, if done in reasonable time. The party not suffering cannot void the contract

If both parties are operating under mutual mistake, either party may void the contract

Question 7

What is an unenforceable contract?

Answer 7

Appears to be valid, but it there is a disagreement, the courts will not get involved in the resolution

Ex. - if a RE contract was not in writing

Question 8

What is an expressed contract?

Answer 8

Contract where words (written or oral) were used to show intentions

Question 9

What is an implied contract?

Answer 9

The actions of the parties demonstrate their intent

Ex. - you sit down at dinner and order food

Question 10

What is a bilateral contract?

Answer 10

Two-sided where more than one party is making a promise to do something

A buyer offers to buy a house if the seller puts on a new roof

Question 11

What is a unilateral contract?

Answer 11

One-sided where one party is bound to perform but the other is not (an option)

The police will pay $5k for information, but will not pay unless they get the information

Question 12

What is an executed contract?

Answer 12

One that has been fully and completely performed

Question 13

What is an executory contract?

Answer 13

One that has not yet been fully performed

Question 14

What is the rule of reason?

Answer 14

Places an obligation on all to conduct ourselves as a reasonable person would

Question 15

What terminates a contract?

Answer 15

1) Performance
2) Mutual agreement
3) Impossibility
4) Operation of law

Question 16

Assignment of contracts

Answer 16

Contracts are freely and fully assignable unless prohibited in the agreement

If 3rd party does not perform, the original (second) party will be liable to perform - called secondary liability

Question 17

What is novation?

Answer 17

Substituting a new contract in for an old one

Question 18

What is a novation of parties?

Answer 18

Where a new party (person) is substituted for an existing one

Question 19

In a breach of contract, if the buyer defaults and the seller rescinds (terminates) the agreement they may exercise what options?

Answer 19

1) Sue for specific performance - will require buyer to perform duties specified in contract
2) Revocation - seller revokes the contract and retains the earnest money deposit
3) Rescission - seller decides to call of contract and returns the earnest money deposit to the buyer - complete reversal of contract
4) Sue for damages - buyer is required to pay seller for any costs associated w the sellers hardship

Question 20

In a breach of contract, if the seller defaults and the buyer rescinds (terminates) the agreement they may exercise what options?

Answer 20

1) Sue for specific performance - will require the seller to perform duties in contract
2) Rescission - calls it off and gets back the earnest money deposit
3) Sue for damages - buyer may be entitled to a judgement against the seller for damages

Question 21

What are liquidated damages?

Answer 21

The remedies either party may recover through litigation may be limited by the terms of the contract. If contract pfe-addresses damages they would be liquidated damages

Question 22

What are punitive damages?

Answer 22

Go above and beyond liquidated damages and are sought to “punish” the breaching party and compensate the injured party

Question 23

What is the statute of limitations?

Answer 23

The legal limit to the time frame under which the injured party can legally sue the breaching party. This varies from state to state

Question 24

What is an open listing?

Answer 24

Seller agrees to pay a commission to any broker who procured a ready, willing, and able buyer at the list price and terms, or such other price and terms agreeable to the seller

No exclusivity to the broker

Question 25

What is an exclusive agency listing?

Answer 25

The seller agrees to hire the broker on an exclusive basis, and agrees to pay a commission to the exclusive broker when the exclusive broker, or any other broker produces a ready, willing, and able buyer

Gives exclusivity to the broker and agrees all brokers must go through him

But owner may sell property himself without owing a commission

Question 26

What is an exclusive right to sell listing?

Answer 26

Seller hires the broker on an exclusive basis and agrees to pay a commission to that broker when producing ready, willing, and able buyer

All brokers must go through that broker and if the owner sells the home will still owe broker a commission

Question 27

What are the commission types?

Answer 27

1) Percentage of sale price
2) Flat fee
3) Net listing commission - commission on what seller must net from sale. Broker keeps what is over a certain number. Creates conflict of interest

Question 28

How can RE listings terminate?

Answer 28

1) Performance
2) Expiration
3) Revocation - broker or seller executing right to terminate listing
4) Abandonment - broker failing to actively market property
5) Mutual consent
6) Death, bankruptcy, or loss of competency
7) Material change - circumstances of property changing
8) Destruction of property
9) Agency coupled with interest - if in agreement there is a personal interest, like broker is partial owner, seller cannot fire broker unless coupled interest is also terminated

Question 29

What is a purchase agreement?

Answer 29

Document that creates agreement btwn seller and buyer that clearly spells out right and duties of each party, purchase price, and terms and details of the transaction

Question 30

What is an addendum?

Answer 30

If parties need to update or add terms to an agreement, they must prepare an addendum to show written evidence of agreement of subsequent terms

Question 31

How do you refer to the buyer and seller in contract process?

Answer 31

Offeror - making the offer

Offeree - receiving the offer

Question 32

What options does the offeree have upon receiving an offer?

Answer 32

1) Accept
2) Counteroffer - if any change is made, no matter how small. Essentially a rejected offer
3) Reject
4) Do nothing
5) Withdrawal or revocation - offeror may withdraw offer, up to the time of notice of acceptance from offeree

Question 33

When does an offer become a contract?

Answer 33

Once it has been accepted by the offeree and communication of that acceptance had been the received by the offeror

Question 34

Closing process - escrow (settlement)

Answer 34

Escrow is “opened” by placing the accepted agreement into the hands of the escrow agent along with the earnest money deposit (EMD)

EMD is not legally required if there are sufficient promises btwn buyer and seller

Question 35

What is equitable title?

What is legal title?

Answer 35

During the escrow period, the buyer is considered to have equitable title or an equitable interest because the buyer had the property under contract and no one else does

Legal title is secured once the closing is completed, deed transfers title from seller to buyer, and the deed is recorded

Question 36

What is the real property owner’s legal bundle of rights?

Answer 36

1) Possession
2) Control
3) Enjoyment
4) Exclusion
5) Disposition

Question 37

What are the parties to a lease?

Answer 37

Owner - landlord - lessor
Non-owner - tenant - lessee

Under the statute of Frauds, a lease of one year or more must be in writing

Question 38

What is a leased fee and leasehold interest?

Answer 38

Lease fee - once agreed to the landlord has a leased fee meaning they own the property but have surrendered rights and possession to the tenant

Leasehold interest - the tenant has this which is the right to possess and use the property, but do not own it

Question 39

What is an estate for years?

Answer 39

Lease with a definite start and end date. Term can be of any duration. If death occurs, unexpired time is inherited by estate of the tenant. Lease is not terminated

Question 40

What is an estate from period to period?

Answer 40

Lease has standard period of time which automatically renews for same period over and over again until one party gives notice to end

Also binding on estates for unexpired period

Question 41

What is an estate at will?

Answer 41

Lease that is open-ended with no specific termination date with notice required to end. Must have reasonable notice given

Question 42

What is an estate at sufferance?

Answer 42

Status when the lease has ended but the tenant remains in possession without the landlords consent

Question 43

What are the lease payment plans for a commercial lease?

Answer 43

1) Gross lease - fixed monthly where landlord pays operating expenses of the property
2) Net lease - tenant pays base rent and all operating expenses. Triple net lease - lessee pays rent, operating expenses, insurance, and common area maintenance
3) Percentage lease - base rent plus percentage of gross business income
4) Graduated lease - agree payment increases over time
5) Indexed lease - tied to an index for inflation
6) Escalation lease - similar to indexed but increases through increases in operating expenses

Question 44

What are leasehold improvements?

Answer 44

Alterations to leased space, usually done at the landlord’s expense and remain part of the leased space

Question 45

What are trade fixtures?

Answer 45

Personal property that are installed and make them a permanent fixture (at tenant’s expense). Normally installed and become part of the RE, but can be removed by tenant at end of the lease

Question 46

What is a constructive eviction?

Answer 46

Means landlord has done or failed to do something that had the effect of denying the tenant use and enjoyment of the leasehold

Question 47

What is a sale leaseback?

Answer 47

An arrangement where the buyer and seller agree to a leasehold. Seller remains in possession of property and compensates the buyer for the possession

Question 48

Who is the optionor and optionee in an option contract?

Answer 48

Optionor - owner of property
Optionee - one buying the option

The optionee must offer option money, or agreed valuable consideration, in exchange for the option to purchase or not to purchase

Question 49

What is time is of the essence in a contract?

Answer 49

It means that if the parties do not do something within the allotted time in the contract, the other party may declare a breach